AOL Stock Down On Patch, Subscriber Loss Concerns

Internet company AOL posted just its second quarter of revenue growth in years and met profit expectations, but shares fell 8.9% on worries about waning subscribers, third-party ad growth and the future of its Patch local media unit.

The New York-based company early Wednesday said Q1 sales rose 2% to $538.3 million from $529.4 million in the year-earlier quarter. That edged Wall Street's view of $537.1 million and marked AOL 's (AOL) second increase in a row after eight years of declines.

Earnings per share jumped 45% to 32 cents from 22 cents. That met the consensus expectations of analysts polled by Thomson Reuters.

Even with Wednesday's decline, AOL's shares are up 28% in 2013 and have more than quadrupled in the past 21 months.

The company's only profitable business is its most troubled. The subscription business, mostly AOL's dial-up Internet service but also search ad revenue from such users, has been losing users for years as broadband has become cheaper and more prevalent.

Its number of subscribers fell 15% in Q1 from the year-earlier quarter, about the same rate of decline as a year ago. Average revenue per subscriber rose 7%, however, so the unit's revenue fell 9% to $165.8 million, less than the 15% year-to-year decline in Q1 2012.

The 9% was the smallest decline in years, notes Mahaney, who wrote that "subscription revenue continues to get less worse."

Subscription profit fell 8%, but at $146.4 million it still accounted for all the company's overall profit. Overall adjusted profit for the quarter was $105.3 million.

AOL's money-losing businesses include what AOL calls its brand group. This includes Patch.com, its network of local news sites; blogging site Huffington Post; popular tech blogs TechCrunch and Engadget; and MapQuest.

The brand group's revenue rose 14% to $189.6 million, but it lost $4.9 million. Still, that's vs. a $16.8 million loss in Q1 2012.

"We continue to innovate Patch's platform while we make a march toward our goal of profitability (for Patch) in Q4 2013," AOL CEO Tim Armstrong told analysts on a conference call Wednesday.

AOL has invested more than $100 million in building Patch.

Patch could add as much as 51 cents in EPS to AOL in 2014 if it performs per AOL's goals, Cowen & Co. analyst John Blackledge wrote in a research report Monday in which he initiated coverage with an outperform, or buy, rating.

Internet company AOL posted just its second quarter of revenue growth in years and met profit expectations, but shares fell 8.9% on worries about waning subscribers, third-party ad growth and the future of its Patch local media unit.

The New York-based company early Wednesday said Q1 sales rose 2% to $538.3 million from $529.4 million in the year-earlier quarter. That edged Wall Street's view of $537.1 million and marked AOL 's (AOL) second increase in a row after eight years of declines.

Earnings per share jumped 45% to 32 cents from 22 cents. That met the consensus expectations of analysts polled by Thomson Reuters.

Even with Wednesday's decline, AOL's shares are up 28% in 2013 and have more than quadrupled in the past 21 months.

The company's only profitable business is its most troubled. The subscription business, mostly AOL's dial-up Internet service but also search ad revenue from such users, has been losing users for years as broadband has become cheaper and more prevalent.

Its number of subscribers fell 15% in Q1 from the year-earlier quarter, about the same rate of decline as a year ago. Average revenue per subscriber rose 7%, however, so the unit's revenue fell 9% to $165.8 million, less than the 15% year-to-year decline in Q1 2012.

The 9% was the smallest decline in years, notes Mahaney, who wrote that "subscription revenue continues to get less worse."

Subscription profit fell 8%, but at $146.4 million it still accounted for all the company's overall profit. Overall adjusted profit for the quarter was $105.3 million.

AOL's money-losing businesses include what AOL calls its brand group. This includes Patch.com, its network of local news sites; blogging site Huffington Post; popular tech blogs TechCrunch and Engadget; and MapQuest.

The brand group's revenue rose 14% to $189.6 million, but it lost $4.9 million. Still, that's vs. a $16.8 million loss in Q1 2012.

"We continue to innovate Patch's platform while we make a march toward our goal of profitability (for Patch) in Q4 2013," AOL CEO Tim Armstrong told analysts on a conference call Wednesday.

AOL has invested more than $100 million in building Patch.

Patch could add as much as 51 cents in EPS to AOL in 2014 if it performs per AOL's goals, Cowen & Co. analyst John Blackledge wrote in a research report Monday in which he initiated coverage with an outperform, or buy, rating.

If it doesn't perform, though, Blackledge says AOL will dump it — which he calls a positive.

AOL's Q1 ad revenue rose 8% to $238.5 million. That includes 10% growth for AOL's third-party ad network, in which AOL serves up ads on other sites. That, however, was lower than expected, say analyst Mahaney and AOL executives.

"Third-party network revenue can and should grow more rapidly, and we are mobilized around that," AOL CFO Karen Dykstra said on the conference call.

AOL continued to cut expenses in Q1, but it still has "more to go," wrote Mahaney.

The company said it had global business expense costs of $33.7 million in Q1, down 32% from $49.8 million in the year-earlier quarter. That's from job cutbacks and spending less on things such as travel and marketing, Dykstra says.

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